This research was published on February 7th, 2022 in World Economic Forum

The thrust of the public debate on inflation is that price growth is here to stay, that policymakers are “behind the curve”, and that the well-anchored inflation regime is crumbling. And, because of this, fiscal policy must step back from making bold new investments. The recent shelving of more than half a trillion US dollars of green investments in the US, because of inflation concerns, could augur a broader headwind.

While inflation risks are real and cannot be dismissed, shunning all fiscal policy is misguided. Fiscal investment is about building capacity over the long run, which can be deflationary, and should be decoupled from monetary policy that has a cyclical mandate. Moreover, the popular narrative of a breaking inflation regime should be challenged. The cost of rushing to conclusions, including nixing or delaying strategically urgent investments, can be high.